Hello and welcome to another episode, the Winning Shop Fight
Podcast with me, your host Nick Truman.
I've got terrible hay fever in the UK, so sorry about my voice,
but we've got a very, very exciting topic for today.
This is right up my street, so cup of tea filled out and you've
got a nice little lemon tea I'm recording on my laptop today.
It's a little lemon tea there and recording on my laptop
today. Because our office is in boxes
in a storage unit which is provided by one of our clients,
I don't have permission to say their name, but as soon as I do,
I'll shout them out. But yeah, we're going to be
talking about something that's right up my street, which is,
I've called it revenue versus profit ads, revenue versus
profit. So let's talk about how people
look at advertising. I'm going to focus on Google
because that's my world. This applies to Meta and other
places. But let's have a little chat
today, guys, over a nice little cup of herbal tea.
And let's have a conversation about the difference between
revenue and profit, why it's important, and actually where a
lot of brands are kind of shooting themselves in the foot
and shouldn't be. And this is really important.
The reason this is so important is I look at hundreds, possibly
thousands of brands every year, every three or four years.
And one of the things I see over and over again is there's such a
high reliance in terms of the percentage of revenue that comes
from advertising. That's not a bad thing, but then
brands don't operate like that and I think we need to.
It's certainly something I've learnt kind of in more recent
years in my career, doing this since 2007.
So yeah, heading towards 20 years.
Something I've learnt the more recent years is that the numbers
will tell you everything you need to know.
And I've learnt that from my FD Mike.
I've learnt that from an advisor I've got and I've learnt that
from working with so many clients.
The numbers will tell you what you need to know.
So today we're going to talk about numbers.
You will need a pen and a piece of paper if you're going to take
it seriously. If you're listening on a
treadmill or something else, iPhone notes, Pause the
treadmill, take a look like play the treadmill.
Everybody needs a little break when they're out on a run at the
gym. Anyway, let's talk about this.
So let's start with the basics and why this is an issue and
where brands I think are going wrong.
The first thing is most products that brands sell have different
margins and this is either net or gross margin.
Net margin being, OK, the product's worth $100 and it
costs US 50 to get. So we've got a Net margin of
$50.00 to play with. It's smaller than that because
of all the other things that we need to think about.
But Net margin is, is you've got that gross margin will be to run
the business. It costs us all our business
costs divided by how many products we sold that month or
how many products we've bought, depending on which way you want
to run your accounts. Gross margin takes into account
all of that. So you might say we've got an
80% Net margin on the product. After all the business costs,
we've got about a 30, maybe 35% margin on that product.
But then we've got one product here which costs $20 and it
costs us 15 to sort of buy it, get it on the shelf, deliver it,
sell it, etcetera, and then deliver it off the customer and
import taxes, blah, blah, blah, blah.
So you might find that the lower product costs, the smaller the
margin tends to be. But also like actually having a
20% margin, although it sounds bad, in essence, if a product
was to cost $5000, the 20% margin is $1000.
And it's only relative to things like click costs, salaries,
running the business and if you can, if you can deliver and it
will sell and deliver to a customer a $5000 product in
actually the same way. Let's say it was nice with
jewellery is a good example, expensive item of jewelry,
fairly simple and easy to ship to deliver.
And you could probably get a smaller margin.
You've got a bigger total amount and the click costs are going to
be the same. If you were selling like phone
cases or something. There are some nuances in click
cost, but generally they're all pretty close to about a pound or
a dollar. Some cost quite a bit more, some
less. It depends on the margins, it
depends on the competition, sorry.
And click cost. But my first point really is all
products are different margins. So why then so people in Google
Ads and Meta ads and other advertising platforms say we've
got a three to one ROI target and it's like, well, hang on,
can we get, and we, we always ask immediately, can we get your
product costs or at least the margins.
So if this product costs $100 and it's got a 70% margin, we
know we've got $70.00 to play with.
If we're spending more than that, we really are losing here.
So flat row as doesn't really work.
You kind of need to look at the profitability of things now to
get a better idea as to what's going on.
Quick zip a tea. So an example here is you've got
one product, it's got a 50% margin.
You've got another product, it's got a 20% margin.
The one that's got a 50% margin, you need 2 to one net to break
even. So half of if you make, if you
sell it for $100.50 was what it cost to get you the product and
you got to spend $50.00 or less to sell it.
Still not going to make the business profitable, but just
the economics of that single product.
That's the idea. You've got a 50% margin on it,
but the one that's only got a 20% margin, you need to make a 5
to 1 ROI or 500% ROI. So you need $5 back for every 10
you spend. So if that was a $100 product,
you can only spend $20 before you've already hit break even to
sell that product. So conclusion, most brands we
talked to are making a loss on probably a bigger percentage
than they are ready to accept or hear from us.
They're probably making a loss on a bigger percentage of their
products or a wider range of their products just on
advertising alone than they actually realise.
It's the eight sometimes it's called the 8020 rule.
There's this kind of magical philosophy that's often very
close to the reality that says actually 80% of your revenue's
made from 20% of the things you actually do and sell.
So if you can stop doing the 80% wasting money and just do more
of the 20%, that 80% of revenue's going to grow.
The business is going to grow quite nice and quickly there.
So there's a few solutions to this problem.
Some you're already writing down going, I need to check the
margins and all my products. You're like correct.
If that's one thing you're going to take away and you've only got
where are we 5 1/2 minutes to listen to this podcast today.
That's your learning. Go and look at margins, sort
your ads out. Bosch, I think you've ever said
that in the podcast. I say Bosch quite a lot.
Sounds really unprofessional, but like Bosch means yes, done
solutions. So number one is get better
margins. So talk to your supplier and
your suppliers and say, look, we're only getting a small
margin on this thing. So actually we need to, we need
a bigger margin on this second. Oh, oh, sorry, let's say get
better margins. There's multiple ways of doing
that, but why don't we talk supply and I'll come onto a few
more in a minute. The other thing you can do as a
solution to this, the second thing is you can split and test
campaigns accordingly. So actually if you if you manage
your campaigns in a way of saying these products are on 20%
margin, these are on 50, these are on 70 and kind of split it
into like 3-3 chunks. You can still have multiple
campaigns within each chunk. But now you're targeting based
on margin. And the campaign in most
advertising platforms is where you set the target.
So if you say, if you say the campaign target is 4 to 1 and
some of your products, so that's 25% margin, but some of your
products only have a 10% margin and you're trying to get a four
to one. If that's wrong, it's bad.
You're losing money on those. You need 1000% margin to make
break even on a 10. Sorry, you need 1000 to one ROI,
sorry, thousand percent, 12:50 ROI 1000% sorry, 1000% is row as
return on ad spend and the 12:50 ROI is return on investment.
They're the same metric ones as a percentage, ones as A and
they're both net. So they're just looking at price
of product versus advertising cost.
So again, if you've only got a 10% margin and you're going for
an ROI of four, ROI of four says 25% margin.
So it's 2 1/2 times where you're profitable.
So you're making a 2 1/2 times loss.
If you just hit target on those items, you see the problem.
So splitting campaigns accordingly is really important.
It's not as simple as just splitting them.
And if you have say, you had four different types of leather
shoe for men, it's going to be the same keyword.
So having one in one campaign, one in another, one in another,
one in another based on the different margins you've got.
What you're doing is you're actually confusing Google a
little bit now or Meta in terms of saying probably more so on
Google because it's the same keyword and Google will go,
well, which of those 4 campaigns do you want me to show you for
that keyword? It will probably choose the one
with the lowest ROI target because it's like I can spend
more at that rate. And also somebody might still
click on that product, the one with the big margin, they'll
click on the big margin product with the lower ROI target to
achieve profitability. They'll click on that and go and
buy a smaller, lower margin product elsewhere.
So with ads, you need to look at what are we advertising versus
what people are actually buying. So if they land on an expensive
item and that expensive item product page recommends lots of
cheaper items, your website's not working.
Is it, let's be honest, like you want to make money, you want to
sell the most expensive or highest margin items, not always
most expensive. You're going to sell the highest
margin items, the ones that are going to make you the most
profit, the ones that are going to sell really easily and have
good conversion rates. You want to sell those.
You don't want someone landing on that and then finding a
really cheap one where it's like actually, we're just break even
on that product. And if you're just break even,
you probably shouldn't have it on your store at all.
Economically, it's a terrible, terrible thing to have a break
even product. And that's break even before
you've even spent anything or run the business.
So you know you're going to make a loss selling that product.
The second thing, yeah, split and test campaigns accordingly,
but you need to be really strategic about how you split
and test those. Get that wrong, ruins
everything. And you might like and make the
point right and start, you might not even know.
You might think ROI is really good.
It's actually really bad. The third thing, you can
increase your product costs. Sorry.
You can input your product costs into Shopify, So what the
product costs you. And that then gives you net
profitability. Depending on how you're running
your campaigns in Google Ads and other platforms, you might then
actually have some data to say, I can split test now based on
the profitability margin because I've tagged all my products or I
have that information in there. So within my feed now I can tag
products using the custom labels, and they could all go
into specific campaigns based on margins.
So now we're being way more savvy and much smarter in the
way that you're approaching these things #4 you also, I
think part of the solution is you need to factor in some
margins to run the business. So what you need to work out is
they're called fixed costs. What am I and I, I have this for
my agency. What are all my fixed costs at
the agency? So what, what are we allocating
to marketing right now? What are we allocating to
salaries across every single person?
What suppliers are we paying right now on a regular fixed
basis? Our off I've mentioned the thing
which office costs, consultants that we work with, our finance
guys, subscriptions we pay for like ChatGPT tools we use, all
that kind of stuff. We want to factor in all those
fixed costs and go the business just needs this much money per
month to operate. So for us to make that much
money per month, we need this much margin, as much kind of net
products sold to run the business.
Now we're at break even, so there might be a, we can say a
lot of businesses come back and say, look, we can spend 10,
twenty, 40% of all of our revenue on marketing and they
agree what that percentage is. So Mike, a lot of businesses
just go, we got a 50% margin. So 25% of the whole business
we're going to spend on all advertising, but that includes
the cost of the marketing team and everything else.
Then we've got another 25% to run our fixed costs in the
business. But all agencies advertising
costs got to come out of the, the 25%, which means we need to
make probably like a four to one ROI target.
Again, these are rough maths. And where it falls down is the
first thing I said, which is the product margins are different
per product. Even if you think they're the
same. We, we've had companies before
say, oh, just just assume it's 40% margin.
Like that's, that's nice and safe.
And then we get into the nuances and go our best selling 20
products that are 80% of our sales.
So 80% of the products we're selling have way worse margins
than that, like less than half. We're just losing money on
Google Apps but everyone thinks it's a success.
Can't scale a problem. I set the clients a lot, don't
scale a problem, fix the problem then we scale.
So factor in those business running costs.
So 4 things you focus on for growth then.
I love numbers season 4 and the first one is lower product
production costs. Here comes the caveat.
Whilst increasing quality. That is not an oxymoron.
They are not opposites you will find with most of your supplies.
And I and I bought my own products.
I sold my own products at the Shopify store before.
I've had a play in this world that you guys live in.
It's a lovely world. It's very different to what I
do, which is why I don't do it anymore.
But if you talk to a supplier and say how many units do I have
to buy to start getting some significant discounts, and then
they might say, yeah, you're paying us $10 per unit right
now. Quick zipity.
So if you watch this on video, the reason I say quick sip of
tea is anyone listening at home is like, hang on, does it stop?
If I say quick sip of tea, you know it's going to be a pause.
You can have a sip of tea as well.
And yeah, say you're paying $10 per unit.
So per item that you're purchasing in at the moment,
they might say right now you're buying about 1000 units a month
and they're costing $10 each. So it's $10,000 a month.
If you double that to $20,000 a month, your unit cost would drop
from $10 to 7 1/2. And you might, you might take a
view and go, do you know what we're selling phone cases or
we're selling sunglasses like I used to, or we're selling pens,
something that doesn't go off, it doesn't expire.
And we, we, we've been running this business for years now.
Let's, let's, let's borrow some money at some investment at a
lower percentage rate than the saving we've got by buying more
products in and without changing anything to the customer, your
product costs have dropped by 25%.
They've gone from $10 to seven and a half dollars.
I would also go back and negotiate, say someone else has
said they can make the same product, the same quality for
this much. And I, you know, I, I really
think you guys should rethink the pricing here.
Like, you know, could we come to an agreement or actually, if we,
here's another thing that some of my clients have done with
product sourcing, they've agreed, even though they're not
paying for it today, they've agreed to buy a minimum order
quantity for like the next three years.
They know they're going to sell that amount of product.
And over those three years, they're allowed to tweak the
design, the colours and some of the variants.
But they've, they've already agreed like we're going to buy
20,000 units a month for the next three years.
And these guys might take a view of it and say, all right, well,
we're going to give you a 20% discount if you sign a contract
agreeing to provide those. And you might even give them
favourable terms and say, right now we pay you 60 days after
you've after we've received the stock.
Now we're going to pay upfront because we have a 10% discount,
10% discount means you've just increased your margin by more
than 10% because you factor in that's the buy cost, factor in
the sell cost. There's loads you can do with
product sourcing. And if you're starting to do
some of those things, you can also improve the quality and
say, do you know what we we would like a trial run of this
product. What kind of deal could you give
us on a trial run of that product?
The better the deal you could give us on a trial run of that
product, the more of them we can sell and the better we'll do
long term. So the first thing, look at your
product production and try and lower the cost of that.
One more solution. I want to give to that and I'm
not going to suggest who because we're trying to get them on the
podcast. So delivery not say they are,
but if you're listening to this, come on the show people be
interested in this. There are companies around the
world that have warehouses at some of the major airports where
your products are manufactured. So these guys in particular have
lots of warehousing in Shanghai within like 10 miles of the
airport. It's a lot cheaper to bulk buy
product, get discount on it. You can use that discount for
example, to store the product in Shanghai and then just sit on
the smallest amount of quantity that you possibly need to in
your European or Pan American warehouse.
So you can have a much smaller warehouse go, we're just going
to sit on like 10 units of each thing because every single week
we've got another box of them coming across from Shanghai now.
And the warehousing cost in Shanghai is next to nothing
compared to what it was in the US.
So we've saved the warehousing costs.
It's called sweating the asset. Find creative ways to make your
overheads and costs cheaper to get your product to customer.
Some companies now will actually send the product straight from
Shanghai straight into the product, the customer's house in
the US, in Europe. And again, doing things like
that you're, it makes you a little bit more immune to import
taxes. You don't have to pay the import
tax until you bring the product in.
There are people who have warehouses on the US, Mexico
border as well to do this. It's just the cheaper, smarter
way of storing products. Second thing that you can do for
the for growth if you really want to start increasing growth
and increasing that margin. The second thing, businesses are
terrified to do this and they should be wary of this, but I
think companies are too scared to do it and I've seen more
positives than negatives of companies doing this.
Put your product price up. Just whack the price up if it's
a popular product. We had, we had initially just
two different pairs of bamboo sunglasses we were selling and
one of them were bamboo arms and then black plastic front.
The other one was a bamboo front were polarised glasses, whereas
the other ones were just UVI can't remember the number now,
UV 400 or something, UV protection lenses that were
black. And then we also had plastic at
the front, bamboo at the sides. They were £20.
The other one was 40. We just they were both 20.
They actually cost us the same. Would you be I think it was
$1.00 more to bring in one that was polarised.
The actual front being wooden was like absolutely fine.
What was amazing though, is we they started it pretty much, I
think it was like 22 lbs and 20 lbs.
And we just the black one, we kept it and we kept a really low
amount of stock because it made the polarized fully bamboo ones
look more expensive. Bamboo is a cheaper material
than plastic. Well, it was when we were buying
them. It was a cheaper material.
Bamboo was cheaper than plastic. Plastic has to go up to high
heat, be melted into the right mold.
Bamboo can grow up to a foot a day in China.
Yeah, I did the marketing. So we were talking about how
much of A valuable renewable resource bamboo is.
If anyone's ever had a bamboo in their garden, you know how much
of A disaster and nightmare The thing is.
Well, if you're trying to grow bamboo to make products out of
it, it's fantastic. They use it for scaffolding in
some countries. We use only metal here in the
UK. I don't know how safe it is, but
just to show it's a really strong material and but you see
how we just kept upping the price of this thing.
So my second thing is don't be scared to up the price,
especially when you're small, less people know who you are.
And you can even say on the site, this price is going up.
It's currently $40. It's going up to $50.00 in three
days. Builds emergency.
Get some more people buying. That might lower your
advertising cost to get someone to buy it.
Then the price goes up. Bang, new, higher price.
Never mentioned it was ever at the old price.
Just be at the new price now, keep increasing that.
While costs have been going up in all countries around the
world at the moment, especially in western society, cost to go
and up, cost to get more expensive.
People are not increasing their product prices at the same rate.
What a fail. You're just eating into your
margins. Sometimes you just do it.
No one complaints. Conversion rate stays the same
and actually you're just, you're literally just getting more
money for selling the same products.
Now you might find conversion rate drops a little bit.
We had one client who they doubled all their prices, no
warning overnight, just went bang.
It's now double. It was the kind of thing you
would only buy once, you wouldn't buy regularly.
We just doubled the prices. We had less than a 50% drop in
sales and get this, the amount of people that talked about
quality, product quality in the reviews increased dramatically.
So we were still selling more than half.
We were making double the money sending out like just over, I
think it was about 60% of the sales we kept.
So now we were only shipping 60% of the products, but revenue was
now up quite dramatically. And again, we're just massively
reduced the size of the business.
Now we just invested more in marketing and increased the
sales at the higher price. Genius.
There are so many case studies of this.
If something is premium, it has to cost a lot or it's clearly
not premium. Premium products are not cheap.
So have a real think about that quick zip a team, improve your
website marketing to improve AOV.
And that's just really basic. I could I could do day long
seminars, possibly week long seminars on average order value
and all the things you could test and how to work out what to
test. But you need to get customers
adding another product cart, either the notification they get
when they add a product, offer insurance.
If the product's worth over a certain amount, that's another
value add. Once someone's completed their
order, give them a discount on another item and a time limit of
like you've got 20 minutes or half an hour to add this item.
And you can go and pay for it. There's no additional delivery
cost. We'll send it out with the first
item or the items you've already purchased.
But you can have 25% off anything on our site because we
know marketing costs us more than 25% or 10% off something.
And again, use AI to recommend what products.
It's so smart. And if you get, I think 3040% of
people adding another product at checkout post purchase and
adding it in, you know, in two transactions, you've got one
delivery cost. It's so simple. 1 customer to
deal with, one item to sell, one lot of packaging to package
those products up. It's really, really smart,
really simple. There's loads of ways to do
this. And then the other one, I talk
about this so much and just kind of a very, very light cover on
this, but lifetime value. If somebody buys twice from you
and the second order came through e-mail or just because,
I mean, I've got some on the actually I won't show them.
I don't have permission from those brands.
I've got some on my desk right now where products have arrived
and they have like a leaflet in saying here's 10% of your next
order. If you're making less than a
12:50 ROI, 10% of your next order, genius.
It's cheaper than marketing as much as I'm a marketing guy and
what the marketing budget. But if everybody starts making a
second, third, 4th order from you, you've got that margin now
because they're making those orders.
You're not paying for the advertising, which is a really
stable business. If something goes wrong with
your advertising and it's driving 75% of everything that
is coming into your business, you have a very, very unsafe
business. One credit card issue, Google
gets confused and disables your entire account, which does
happen. Bang, you've got problems,
right? Do these four things well.
So lower product costs and increase quality at the same
time, increase product prices even just a little bit, just for
now, and stretch AOV through better marketing and website
optimization. And #4 stretch the margin
through lifetime value as much as possible.
It's not the product margin. Get this repeat orders and that
the margin, the margins that you're making per customer from
customer acquisition cost to customer value is being
stretched. Do all of that and you can start
chucking more money into advertising and you're doing it
particular profitably. There we go.
We've got the word out. Thanks for tuning in everybody
back again on Friday. We've recorded so many episodes
in advance now so excited as well.
One of my clients is coming on to show off their amazing
knitwear soon as well. I was wearing the jumper, but it
was affecting I've got my mobile microphone today.
It's affecting the microphone on the zip.
So I I'll be wearing that in an episode soon as well with my
client Islands eye. They're absolutely amazing.
Thanks for tuning in. You guys have been great hit
subscribe if you haven't already, go and join our
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September. It's going to be super exciting.
So going to that thanks for tuning in.
Hope you join us again.